Texas’s Major Lien Law Makeover: What You Need to KnowChapter 53 of the Texas Property Code just received major updates for the first time in years. On June 15, 2021, Gov. Greg Abbott signed into law HB 2237. This bill makes many notable changes to Texas’s lien laws. The construction industry and construction lawyers should take note of these changes to the complex and often confusing world of mechanic’s, contractor’s, and materialman’s liens in Texas. These changes to the Texas Property Code will take effect on January 1, 2022. Below is a review of some notable changes made to Chapter 53 of the Texas Property Code. To see all the changes enacted visit the Texas Legislature’s website to view HB 2237 in its entirety.

Notable Changes:

  • HB 2237 includes various changes to the definitions within Chapter 53, including the definition of “Improvement,” “Labor,” “Material,” “Residence,” “Retainage,” “Subcontractor,” and “Work.” Additionally, the amendments in HB 2237 add a definition for “Purported original contractor.” This newly defined term is used in Section 53.026. Under this revision a person who is in a direct contractual relationship with a “Purported Original Contractor” is considered an original contractor for lien perfecting purposes. This is a change from the previous version which required a direct contractual relationship with the owner to be considered an original contractor. A few of the notable changes to the existing definitions include the addition of designs, drawings, plans, plats, surveys and specifications by architects, engineers, and surveyors to the definition of “Improvement.” The definition of “Labor” received similar changes to include the professional services in the “direct preparation for the work of a design, drawing, plan, plat, survey, or specification.” The definition of “Subcontractor” was clarified to include one who furnishes labor or materials to the original contractor or to a subcontractor “of any tier.” The language including a subcontractor “at any tier” was specifically added to the definition.
  • Section 53.003: “Notices” has been amended to require in-person service of notice, certified mail service of notice, or other traceable forms of private mail that include proof of receipt. Although permitted in the current rule, under the amended rule registered mail is no longer a permitted method of delivery. Also notable in this section, is that the Legislature expressly provides that if the deadline for providing notice falls on a Saturday, Sunday or legal holiday, the period extends to the next day that is not a Saturday, Sunday, or legal holiday.
  • Section 53.056: “Derivative Claimant: Notice to Owner and Original Contractor” also received significant and notable changes designed to simplify the notice requirements for subcontractors. A notable change was made to the double notice requirement for subcontractors. Formerly, subcontractors of non-residential projects were required to send a notice to the original contractor “not later than the 15th day of the second month” after the month the labor was performed or materials delivered, and then send the same notice to the owner and original contractor “not later than the 15th day of the third month” following “each month in which all or part of the claimant’s labor was performed or material or specially fabricated material was delivered.” There are many complexities with accurately meeting these notice requirements based on different deadlines. The Legislature simplified the notice required by amending the rule to require only one notice be sent to the contractor and owner at the same time and by the same deadline. Instead of having to track two different deadlines, now Section 53.056 only requires one notice sent to both the original contractor and the owner no later than the 15th day following the third month.
  • Section 53.057: “Derivative Claimant: Notice for Contractual Retainage Claim” covering retainage also received a makeover in HB 2237. First, the title changed to “Derivative Claimant: Notice of Claim for Unpaid Retainage.” More importantly, the deadline for filing an affidavit claiming a lien currently is the earlier of several listed days. Effective January 1, 2022, the deadline is simplified and is based on the date required for filing an affidavit under the applicable provision of Section 53.052.
  • The time for bringing a suit to foreclose a lien has been modified. The deadline that was previously the later of “two years after the last day a claimant may file the lien affidavit under Section 53.052 or within one year after completion, termination, or abandonment of the work under the original contract under which the lien is claimed” is now set as “the first anniversary of the last day a claimant may file the lien affidavit under Section 53.052.” The deadline may now be extended by agreement to the second anniversary of the last day a claimant may file the lien affidavit under Section 53.052 under specific circumstances.

Numerous other changes were made to the Texas Property Code in HB 2237. Accordingly, any construction lawyer in Texas or advising clients in Texas should review these changes to ensure compliance with the amended rules come January 1, 2022.

Willful Misconduct Defined, How Broad Is That Exception to Your MSA?In Texas, most Master Service Agreements related to the oil and gas industry provide indemnities based on who or what was injured rather than who caused the injury. For example, the standard knock-for-knock indemnity will provide that an operator will defend and indemnify the contractor for injury to the operator’s employees even if the injury to the operator’s employees is wholly caused by the fault of the contractor. Similarly, in turn, the contractor will defend and indemnify the operator for injury to the contractor’s employees regardless of the operator’s fault. The reasoning behind this is that each party is better suited to control and watch over their own employees and purchase insurance for their own employees to mitigate the risk. In a similar fashion, often the most catastrophic risks (pollution, wild well, underground damage) are borne disproportionately by the operator because the operator is in the best position to supervise the site and purchase insurance to cover the risk.

However, almost all MSAs have an exception to their no-fault indemnities for particularly egregious conduct, with most carving out an exception for injuries caused by “willful misconduct” or “gross negligence” of the party seeking indemnification. Gross negligence has long been defined under Texas law, and is even codified by statute, as requiring proof of two elements:

(A) [ ] when viewed objectively from the standpoint of the actor at the time of its occurrence involves an extreme degree of risk, considering the probability and magnitude of the potential harm to others;  and

(B) of which the actor has actual, subjective awareness of the risk involved, but nevertheless proceeds with conscious indifference to the rights, safety, or welfare of others. (Tex. Civ. Prac. & Rem. Code § 41.001(11))

As for “willful misconduct” though, there has been a nearly complete lack of Texas case law defining the term despite its presence in the vast majority of MSAs.

In May, the Houston (14th) Court of Appeals issued its opinion in Apache Corp. v. Castex Offshore, Inc., providing the first concrete, working definition for willful misconduct from a Texas court: “deliberate mismanagement committed without regard for the consequences.” For those who believed that willful misconduct provided a higher standard than gross negligence (more akin to intentional harm) the opinion likely comes as a surprise.

In Apache, the operator (Apache) was sued by a non-operating working interest owner (Castex) for the operator’s overspending on a project that ballooned from an initial Authorization for Expenditure (“AFE”) of $16.9 million to a total cost of $102 million. Castex argued that Apache’s knowing and repeated decisions to exceed the budget (without adequate excuse for the same) showed a level of misconduct far beyond mismanagement or negligence. A provision in the parties’ joint operating agreement provided that Apache would only be liable for conduct amounting to gross negligence or willful misconduct. A jury found that Apache did not commit gross negligence, but did find that the increased cost was caused by Apache’s willful misconduct.

On appeal, Apache argued that willful misconduct required “a subjective, intentional intent to cause harm” and that because Apache clearly did not intend to drive up costs (of which it was 75% responsible) it was not liable for willful misconduct. The court of appeals rejected Apache’s suggestion, however, and created a definition based on an intent to do a wrongful act (regardless of the consequences) rather than a specific intent to bring about the consequences. The court held that evidence that showed that Apache deliberately, and repeatedly, disregarded the budget and spent in excess of the AFE (and chose not to submit a supplemental AFE for months) amounted to sufficient evidence of willful misconduct.

So, what does this mean for your MSA? Well, as every lawyer will tell you… it depends. The Houston Court of Appeal’s focus on “deliberate mismanagement” will likely make certain scopes of work (such as consultants) more susceptible to the exception than others. Further, the definition of willful misconduct is not going to be uniform across all 50 states and may not even stay the same in Texas if the Texas Supreme Court overrules the Houston Court of Appeals. Given the potential confusion regarding the definition of willful misconduct then, the best route might not be to delete the exception, but to define the term “willful misconduct” in the MSA to what the parties actually intend the term to be.

Measuring the Long Arm of Texas Courts: When Is an Out-of-State Supplier Subject to Texas Jurisdiction? Suppliers of construction products and materials frequently find that their products and materials are used in projects located in states where the supplier may not have an office, factory, or production facility. Some suppliers may believe that because they don’t have an office or factory in Texas, they cannot be sued in a Texas court. A recent opinion from the Texas Supreme Court provides suppliers whose products and materials are involved in a Texas project a clearer picture of when they can be subject to the jurisdiction of a Texas court.

Case Background

SprayFoamPolymers.com, LLC is a Connecticut corporation with its principal place of business and sole office in Connecticut. SprayFoam’s business focuses on the manufacture and sale of spray foam insulation to residential and commercial customers. SprayFoam receives and processes all customer orders from its Connecticut office.

In 2013, Texas homeowners hired Old World Cast Stone to install spray foam insulation into the wall cavities and roof deck of their new home. After moving into the home, the homeowners alleged that the insulation caused coughing spells, itchy and burning eyes, allergies, and headaches. In 2014, the homeowners determined that Old World had utilized a SprayFoam insulation product in their home. In response, SprayFoam sent a Texas-based “independent contractor sales representative” to inspect the home. Thereafter, the homeowners sued Old World and SprayFoam in Texas state court. SprayFoam fought the Texas state court’s exercise of jurisdiction. Following a decision from the trial court that SprayFoam was subject to jurisdiction in Texas, and the court of appeals’ subsequent decision that SprayFoam was not, the homeowners appealed the case to the Texas Supreme Court.

The Texas Supreme Court’s analysis focused on this question: Despite SprayFoam’s presence in Connecticut, had SprayFoam demonstrated that it intended to serve the Texas market, such that SprayFoam should be subject to the jurisdiction of Texas courts?

The Texas Supreme Court noted that SprayFoam had utilized a Texas distribution center to handle logistics for SprayFoam’s products in Texas. The court also focused on SprayFoam’s retention of a Texas-based “independent contractor sales representative” to find customers in Texas for SprayFoam’s products. The fact that the Texas-based individual was not a SprayFoam employee did not override SprayFoam’s intent behind working with the individual, which was to tap into the Texas market and reap the economic benefits from the individual’s sale of SprayFoam products in Texas. Finally, the court’s analysis found that the homeowners’ suit against SprayFoam arose out of the installation of a SprayFoam product that SprayFoam intended to market and sell in Texas. Accordingly, the Texas Supreme Court found that the Texas court’s exercise of jurisdiction over SprayFoam was proper.

Considerations for Suppliers of Construction Products and Materials

  • Do you utilize Texas-based facilities to distribute or store your products or materials?
  • Do you work with Texas-based independent contractors or employees to sell or market your products or materials?

If the answer to the above questions is “yes,” that supplier may be subject to the jurisdiction of Texas courts, even where the supplier does not have an office or factory in Texas.